1. Consumer Behavior and the Stickiness of Credit-Card Interest Rates

Between May 1989 and November 1991, the prime rate dropped from 11.5 percent to 7.5 percent, and the interest rate on large- denomination CD's fell from around 9 per- cent to 5 percent. During this period, bank credit-card rates barely moved, the largest issuers holding their rates fixed at 18-20 percent.

2. The Failure of Competition in the Credit Card Market

The bank credit card market, containing 4,000 firms and lacking regulatory barriers, casually appears to be a hospitable environment for the model of perfect competition. Nevertheless, this article reports that credit card interest rates have been exceptionally sticky relative to the cost of funds. Moreover, major credit card issuers have persistently earned from three to five times the ordinary rate of return in banking during the period 1983-1988. The failure of the competitive model appears to be partly attributable to consumers, making credit card choices without taking account of the very high probability that they will pay interest on their outstanding balance.